Public gross financing needs are expected to rise by 33.85 per cent to a total of $1.044tn in 2021 to 2022, from $780bn in 2018 to 2019.
The International Monetary Fund made the projection on Wednesday in a report on debt and financing risks from COVID-19 in the Middle East and North Africa.
“Financing needs during 2021–22 are expected to remain above 15 per cent of gross domestic product, on average, in most MENAP’s emerging markets, however, with limited needs from external debt amortisation of about 4 per cent of GDP,” the IMF stated.
The fund explained that since prospects for heavily tapping international markets were limited, banks’ exposure to the state is likely set to accelerate in the years ahead.
It said, “This could crowd out private sector credit at a time when private financing is critically needed to spur the recovery.”
The IMF recalled that the ‘Regional Economic Outlook’ had estimated that budgetary needs could be further exacerbated by three per cent of GDP under a potential shock scenario involving rapid tightening of global financial conditions along with delayed fiscal adjustment due to a protracted recovery.
It said if domestic banks fund these unexpected needs, in addition to the expected financing needed during 2021–22, Egypt, Oman, Pakistan, and Tunisia would absorb an additional 10 to 23 per cent of banks’ assets as government debt by the end of 2022.
“As a result, Egypt and Pakistan’s banks could reach levels of public sector exposure similar to those currently seen in Lebanon,” IMF added.
The fund, however, suggested that policies could help countries reduce debt exposures.
It said countries would need credible and clearly communicated medium-term fiscal and debt management strategies, which would require bringing together the monetary, fiscal, and financial sector regulatory authorities to form a common view on the overall absorption capacity of domestic financial markets.
It also suggested that countries with limited or no fiscal space would need to initiate growth-friendly consolidation plans as the crisis subsides.
“In countries with market access, policymakers should work to proactively mitigate rollover and refinancing risks. Engaging in liability management operations (such as extending maturities) can improve terms on existing debt and the medium-term debt profile. In countries where market access is more limited, governments could consider reprofiling their commercial and bilateral debt,” it explained.
The fund further suggested the development of domestic capital markets, broadening investor base, and expanding banks’ opportunities to diversify assets, including from progress on financial inclusion, to help reduce risks from banks’ overexposure to the state.
“Over the medium term, policymakers could introduce changes to banking regulations to reduce the existing bias of banks’ asset portfolios toward government bonds,” IMF added.
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